Labor: An ERISA Plan for Litigation (Part III)

The Employee Retirement Income Security Act (ERISA) plan for litigation addresses participant reimbursement of the plan for costs and expenses recovered from third parties, as well as participant restitution for overpayments by the plan. The Supreme Court recently affirmed the importance of the ERISA plan to ERISA benefit claim litigation in US Airways v. McCutchen, a case involving plan reimbursement. Careful drafting of an ERISA plan can provide an employer a greater likelihood of successful recovery for restitution and reimbursement.

Part one of this three-part series on preparing an ERISA plan for litigation addressed exhaustion of administrative remedies, gaining the benefit of discretionary decision-making, and setting the litigation forum. Part two addressed defining the statute of limitations and the benefit claim accrual date. Part three addresses reimbursement and restitution – two issues keenly linked to plan language that increases predictable outcomes and the likelihood of success in ERISA litigation.

Reimbursement

In the ERISA context, reimbursement is a recovery from a plan participant of money paid by the plan and reimbursed to the participant by another, such as a third-party tort-feasor. Broad plan reimbursement language will increase the plan’s likelihood of recovery for reimbursement, because the courts will enforce the plan as written. On the other hand, when a plan is silent about reimbursement, the courts are left to fill the gap with equitable remedies. Plan reimbursement language should explicitly address a handful of topics:

1. First-dollar recovery: The plan should state that it has the first right to reimbursement in advance of all other parties, including the participant, and a priority over any money recovered from third-parties.

2. Disclaimer of “make whole” doctrine: The plan should state that its right to reimbursement negates or overrides the “make whole” doctrine. The premise of the make whole doctrine is that the plan participant should be fully compensated (or “made whole”) before a right of reimbursement will be allowable. Typically the disclaimer of the make whole doctrine occurs in conjunction with the right to first-dollar recovery.

3. Disclaimer or limitation of the “common fund” doctrine: The plan should state that its right to reimbursement negates or overrides the “common fund” doctrine. The common fund doctrine provides that a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney’s fee from the fund. The common fund doctrine was applied by analogy in McCutchen, a single-plaintiff case, to fill the gap left by a plan silent as to the payment of attorney’s fees. In McCutchen, the application of the doctrine allowed for the participant’s attorney to take money from the recovery even though the plan had not been fully reimbursed. For those worried that a total disclaimer of the common fund doctrine may discourage participants (and their attorneys) from pursuing third parties, the plan can limit the application of the doctrine by expressly stating the amount an attorney may take for fees and expenses from any reimbursement recovered. For example, the plan can state that the plan’s reimbursement will be net of attorney’s costs and fees not to exceed a specific percentage of the amount recovered.

4. Right to reduce future benefits in repayment: The plan should state that if the participant does not reimburse the plan, future benefits may be reduced to offset the unpaid reimbursement.

5. Right to sue and be reimbursed for enforcement: The plan should state that it has the right to bring legal action to enforce its reimbursement right and that the costs and expenses incurred by the plan to assert a claim for reimbursement is also reimbursable.

Broad and clear reimbursement provisions will increase the likelihood that ERISA plans obtain a recovery from amounts paid by third parties to plan participants.

Restitution/Recoupment

Plan overpayments happen for a variety of reasons, including miscalculation and failure by a plan participant to report sources of payment that may offset ERISA plan benefits. A close cousin to the reimbursement concepts above, restitution by a plan participant for overpayment of benefits is more likely if the plan contains a clear restitution provision.

Until recently, courts struggled defining the types of relief available to a plan seeking recovery from a participant, often requiring that the funds the plan sought to recover be specific, identifiable and in the participant’s possession. These courts often referenced the concept of “tracing” to identify the specific recoverable funds. Since the 2006 Sereboff decision, many courts have relaxed the strict tracing requirements.

Because the courts treat ERISA plans like contracts, certain plan provisions will increase the likelihood of recovery of overpayments.

1. The plan should contain a promise by the participant, as a condition of participation in the plan, to repay any overpaid benefits.

2. The plan should state that it will stop paying benefits until the overpayments are returned to the plan.

3. The plan should state it has a lien in the amount of the overpayment that exists at the moment the overpayment occurs and on the proceeds of any other income.

An ERISA plan ready for litigation will address reimbursement and restitution, and just like the other topics in this series – exhaustion of administrative remedies, discretionary decision-making, forum selection, statutes of limitation, and accrual – a clear and unambiguous statement of the plan’s rights will increase the plan’s likelihood of success.